Stephen Bainbridge's Journal of Law, Religion, Politics, and Culture

April 2014

04/29/2014

Google reads your email, reads your chats. It knows what you’re searching for. It sees you when you’re sleeping and knows when you’re awake. And the server is economically incentivized to remember. The way to make money on the internet these days is to get people to exchange personal information for free, and you get them to do that by making them think they’re just interacting with the service: sending an email or searching or chatting with a friend. But there’s this underlying architecture there.

Google just updated their privacy policy to explicitly state that they read your emails and your chats to better serve you targeted advertising. The final straw for Google was when they changed the privacy policy in 2012, and that they aggregated information about you on all these platforms.

I'm going to teach a seminar on corporate social responsibility next year. If you've taught on in a law or business school, I'd be very appreciative if you would send me syllabi, reading lists, suggested student paper topics, etcetera. Thanks!

In a provocative WSJ op-ed, Henry Mannecompares the prohibition of insider trading to the prohibition of alcohol:

Just as Americans found ways to keep drinking, Wall Street will always look for an edge.

The much-hyped modern insider-trading prosecutions and their results are reminiscent of nothing so much as Prohibition-era government attacks on bootleggers. There is about as much chance of stopping trading on undisclosed financial information as there ever was of stopping the consumption of booze. There is simply too much money sloshing around the world's stock exchanges waiting for an "edge." Information is more mercurial than mercury and will seep into some crevice in the system no matter how many channels are closed. ...

The imagination of wealth seekers in using valuable information in the stock market will always outpace the ability of regulators to cope. The payoffs are too big and too accessible and the number of willing players too great for the practice to be significantly inhibited by scores of convictions. But political reputations can still be made by convincing investors that these prosecutions are in their interest and will significantly alter the market's behavior.

The case for outlawing insider trading is even weaker than it was with alcohol. The latter did in many cases inflict real damage—to careers, family relationships, livers. Insider trading not only does no harm, it can have significant social and economic benefits including a more accurate pricing of stocks.

But that is not the story for today, and it has been told many times (and never seriously refuted). The story for today is that we are repeating the errors of Prohibition. We see federal prosecutors making names for themselves by convicting mostly low-level functionaries. We see the so-called corruption of otherwise good folks, including medical researchers and high-tech specialists, with valuable information. Yet with so much wealth at stake, this "corruption" surely goes far beyond what prosecutors have been able to demonstrate.

It is high time to stop this ridiculous posturing. We really don't need another government failure like Prohibition.

On Friday, April 11, and Saturday, April 12, 2014, the Lowell Milken Institute for Business Law and Policy will sponsor a conference on competing theories of corporate governance. The conference, which is organized by Professor Stephen Bainbridge, William D. Warren Distinguished Professor of Law, will provide a venue for distinguished legal scholars to define the competing models, critique them, and explore their implications for various important legal doctrines.

Corporate law and economics scholarship initially relied mainly on agency cost and nexus of contracts models. In recent years, however, various scholars have built on those foundations to construct three competing models of corporate governance: director primacy, shareholder primacy, and team production.

The shareholder primacy model treats the board of directors as agents of the shareholders charged with maximizing shareholder wealth. Scholars such as Lucian Bebchuk working with this model are generally concerned with issues of managerial accountability to shareholders. In recent years, these scholars have been closely identified with federal reforms designed to empower shareholders.

In Stephen Bainbridge’s director primacy model, the board of directors is not a mere agent of the shareholders, but rather is a sui generis body whose powers are “original and undelegated.” To be sure, the directors are obliged to use their powers towards the end of shareholder wealth maximization, but the decisions as to how that end shall be achieved are vested in the board not the shareholders.

Margaret Blair and Lynn Stout’s team production model resembles Bainbridge’s in that it is board-centric, but differs in that it views directors as mediating hierarchs who possess ultimate control over the firm and who are charged with balancing the claims and interests of the many different groups that bear residual risk and have residual claims on the firm. Although team production is not explicitly normative, many commentators regard it as at least being compatible with stakeholder theorists who promote corporate social responsibility.

Now, apparently, a writer's politics are the most important thing, and authors with the wrong politics are no longer acceptable, at least to a loud crowd that has apparently colonized much of the world of science fiction fandom.

The Hugo Awards are presented at the World Science Fiction Society's convention ("Worldcon") and nominees and awardees are chosen by attendees and supporters. The Hugo is one of the oldest and most prestigious awards in science fiction, but in recent years critics have accused the award process — and much of science fiction fandom itself — of becoming politicized.

That's certainly been the experience of Larry Correia, who was nominated for a Hugo this year. Correia, the author of numerous highly successful science fiction books likeMonster Hunter Internationaland Hard Magic, is getting a lot of flak because he's a right-leaning libertarian. Makes you wonder if Robert Heinlein could get a Hugo Award today. (Answer: Probably not.) ...

The ins and outs of politics and science fiction fandom are inside baseball to most people, though lately they've been juicier than usual. But unfortunately, this sort of thing is symptomatic of what's going on in a lot of places these days. Purging the heretics, usually but not always from the left, has become a popular game in a lot of institutions. It just seems worse in science fiction because SF was traditionally open and optimistic about the future, two things that purging the heretics doesn't go with very well.

Frankly, SF fandom has always bored me, regardless of politics. Imagine a junior high school in which the nerds have become the top clique and you've got a good mental image of the SF conventions I've attended. But The Purge worries the hell out of me, so I'm saddened to see it come to SF.

04/27/2014

The previous examples suggest that shareholders should pay attention to matters involving the per- sonal lives of CEOs and take this information into account when making investment decisions.

The authors explain that:

There are at least three potential ways in which a CEO divorce might impact a corporation and its shareholders. The first is loss of control or influence. A CEO with a significant ownership stake in a company might be forced to sell or transfer a por- tion of this stake to satisfy the terms of a divorce settlement. This can reduce the influence that he or she has over the organization and impact decisions regarding corporate strategy, asset ownership, and board composition. ...

Second, divorce can affect the productivity, concentration, and energy levels of the CEO. ...

Third, divorce can influence a CEO’s attitude toward risk. ...

But do the corporation's directors have any legal obligation to monitor the CEO's personal life, including the health of his/her marriage? I don't think so.

The most directly relevant precedent is Beam ex rel. Martha Stewart Living Omnimedia, Inc. v. Stewart, 833 A.2d 961 (Del.Ch. 2003), aff’d, 845 A.2d 1040 (Del. 2004), which was a derivative action against Martha Stewart and other officers and directors of Martha Stewart Living Omnimedia (MSO), a public corporation with dual-class common stock. Stewart, who held 94.4 percent of the voting control, is, as the court puts it, “a household icon, known for her advice and expertise on virtually all aspects of cooking, decorating, entertaining, and household affairs generally.”

The Board, at the time the case arose, consisted of Stewart (CEO and founder), Patrick (President and Chief Operating Officer), Martinez (former CEO of Sears, Roebuck, which was an important retailer of MSO products), Moore (partner in an investment banking firm and longtime friend of Stewart), Seligman, Ubben, and Doerr (famous partner in a leading Silicon Valley venture capital firm). MSO’s market, as the court explains, is “uniquely tied to the personal image and reputation of its founder, Stewart.”

Stewart was a close friend of Samuel Waksal, who was CEO of ImClone. Waksal learned that the FDA had rejected approval of a drug developed by ImClone and vital to its success. Waksal sold his own ImClone shares and tipped his father and his daughter. (He wound up in jail.) Stewart learned from her broker’s assistant that Waksal was dumping shares. She sold all her shares. The SEC and federal prosecutors investigated the possible violation of Rule 10b-5. Stewart eventually was indicted for obstructing justice and lying to federal prosecutors in defending herself based on the claim of a pre-arranged plan for sale of her shares. In March 2004 the case was tried and a jury found Stewart guilty. She subsequently served five months in prison and an additional five months house arrest.

Plaintiff Beam claimed that the MSO board was derelict in failing to monitor Stewart’s activities. The court rejected this Caremark-like claim, observing that:

Regardless of Stewart’s importance to MSO, she is not the corporation. And it is unreasonable to impose a duty upon the Board to monitor Stewart’s personal affairs because such a requirement is neither legitimate nor feasible. Monitoring Stewart by, for example, hiring a private detective to monitor her behavior is more likely to generate liability to Stewart under some tort theory than to protect the Company from a decline in its stock price as a result of harm to Stewart’s public image.

So while a board--as a matter of best practice--might consider the impact of the CEO's divorce on the business, I don't think they have any legal obligation to do so or to periodically update themselves on the health of the CEO's marriage.

04/25/2014

Lawyers are free to mine the social-media accounts of jurors, but they may not request access to an account that’s hidden behind a privacy wall, according to an ethics opinion issued Thursday by the American Bar Association.

In sum, the rules give lawyers a green light to scour a juror’s Twitter feed, Facebook account or any other site where they posted comments, photos or videos about themselves for anyone to see. Everything that’s public online is fair game. And the same goes for potential jurors during jury selection.

Yes, I know that as an attorney I should not encourage people to duck jury service, blah blah blah, but it does seem that a few strategically timed and worded tweets could get you out of jury service. Undergoing voir dire in a criminal case? Tweet that "Anybody who gets charged must be guilty or why else would they have been arrested?" Undergoing voir dire in a slip and fall case? Tweet "Trial lawyers are the scum of the earth" and "Slip and fall cases are all bogus." Done well and you might just get tossed on a preemptory challenge.

Columbia University President Lee C. Bollingertoday announced his appointment of Gillian Lester, professor and acting dean of the University of California, Berkeley, School of Law, as the fifteenth dean of Columbia Law School, effective January 1, 2015. ...

“I’m honored to take on the leadership of Columbia Law School at this pivotal time,” said Lester. “I’m looking forward to working with its distinguished faculty, talented students and accomplished alumni. Indeed, I’m looking forward to joining the broader Columbia community and ensuring that the Law School continues to play an essential role in this truly great University.”

Setting aside the fact that this is yet another example of how Canadians are taking good US jobs, both Gillian and Columbia are to be congratulated. They should make a great match.

Elizabeth Pollman (Loyola LA) has been doing some very interesting work, albeit reaching substantive conclusions with which I have often disagreed but only after having my preconceptions challenged and new lines of inquiry being suggested. Her latest paper is a case in point: A Corporate Right to Privacy (April 1, 2014), which is forthcoming in the Minnesota Law Review, and is currently available at SSRN: http://ssrn.com/abstract=2419297:

Abstract: The debate over the scope of constitutional protections for corporations has exploded with commentary on recent or pending Supreme Court cases, but scholars have left unexplored some of the hardest questions for the future, and the ones that offer the greatest potential for better understanding the nature of corporate rights. This Article analyzes one of those questions — whether corporations have, or should have, a constitutional right to privacy. First, the Article examines the contours of the question in Supreme Court jurisprudence and provides the first scholarly treatment of the growing body of conflicting law in the lower courts on this unresolved issue. Second, the Article examines approaches to determining the scope of corporate constitutional rights and argues that corporate privacy rights should be evaluated not by reference to the corporate form itself or a notion of corporate personhood, but rather by reference to the privacy interests of the various people involved in the corporation and their relationship to the corporation. Further, because corporations exist along an associational spectrum — from large, publicly traded corporations constituted purely for business purposes to smaller organizations with social, political, or religious purposes — the existence of a corporate privacy right will and should vary.

Fundamental point of disagreement: Pollman recognizes that the question is complex and difficult, but at the end of the day her analysis assumes that there is some generic constitutonal right of privacy. In contrast, I regard the whole idea of constitutonal "penumbras" as an abomination that should never have been allowed to live. In my view, not that it matters, the Constitution is a document of enumerated powers and rights. Hence, while specific aspects of privacy are protected, there really is not (or, at least, ought not to be) a generic right of privacy. Indeed, I'm not convinced that there is such a right. To be sure, this is not my area of the law, but as I read the Supreme Court cases the "right of privacy" basically exists to enshrine the sexual revolution into the Constitution. As Pollman herself points out, most of the Supreme Court cases in this area deal with "reproductive freedom, sexuality, and family relationships."

Point of fundamental agreement: Pollman argues that:

The corporation may be better positioned or the only effective actor to vindicate the privacy interests of these individuals acting in association. Further, the freedom to associate, a right that is understood to extend to groups including corporations, is linked to the concept of privacy. ... Thus, there are reasons to believe a constitutional right to privacy may be an important check against government power for individuals who act together through the corporate form, but that according such a right to all corporations would be unfounded and could powerfully shield them from investigation or regulation. (5-6) ...

Contrary to public belief, the Court’s jurisprudence extending constitutional protections to corporations does not do so on the basis that corporations themselves, as legal entities, are like natural persons. Rather, the doctrine of corporate personhood merely stands for the principle that a corporation can be accorded protections in order to protect the rights of the individuals associated through the corporate form. (24)

[C]orporations do not receive rights because the characteristics of the entity so closely resemble a natural human so as to merit granting the right; rather corporations receive rights because, as forms of organizing human enterprise, they have natural persons involved in them and sometimes it is necessary to accord protection to the corporation to protect their interests. (25)

I couldn't agree more, but I do have a suggestion. In the current draft, Pollman doesn't cite the late Larry Ribstein's work on the corporation and the constitution. Larry's work on developing a nexus of contracts-based theory of corporate constitutional rights is squarely on point and supports at least this part of Pollman's argument. In The Constitutional Conception of the Corporation, 4 Sup. Ct. Econ. Rev. 95 (1995), for example, Larry argued that the first amendment rights of corporations exist to protect speech by managers:

Under the contract theory of the corporation, the separate corporate entity disappears for constitutional purposes and the speech is attributed to those immediately responsible for it.

The corporation, as a nexus of contracts, obviously cannot be “speaking.” Accordingly, corporate speech should be constitutionally protected only to the extent necessary to protect the rights of individuals connected with the corporation. In closely held corporations with decentralized management, the owner-managers usually are speaking for the corporation. In publicly held corporations, however, there is some question as to who the speakers are, and therefore who, if anyone, should be protected by the First Amendment. Before considering the extent of constitutional protection that should be accorded corporate speech, it is necessary first to consider precisely whose First Amendment interests are at stake, particularly in publicly traded corporations.

You have a boss, and at the same time people report to you. In fact, at the company where you work, every employee reports to a single other person.

Actually, that’s the way it works in just about every company, notwithstanding a popular perception that the trend toward flatter organizations equates to a weakening of corporate America’s traditional hierarchical power structure. That popular perception is nonsense, according to Jeffrey Pfeffer, a professor of organizational behavior at Stanford Graduate School of Business. Indeed, the hierarchical structure has barely changed in hundreds of years and shows no signs of doing so now, Pfeffer says in this article published by the school. That’s because it inevitably creates solid benefits, for both the organization and its individual members.

That’s not what many Millennials want to hear, of course. Millennials — the generation of current workers born from about 1980 to the mid-1990s — tend to have “this belief that we are all living in some postmodernist, egalitarian, merit-based paradise and that everything is different in companies now,” Pfeffer says in the article. “But in reality, it’s not.” In fact, even companies started by Millennials ultimately wind up with the typical organizational structure around leadership and power, the article notes.

This does not come as a surprise. Back in the 1990s, I reached the same conclusion in Privately Ordered Participatory Management: An Organizational Failures Analysis (September 1997). Available at SSRN: http://ssrn.com/abstract=38600:

Abstract: American industrial enterprises long organized their production processes in rigid hierarchies in which production-level employees had little discretion or decision making authority. Recently, however, many firms have adopted participatory management programs purporting to give workers a substantially greater degree of input into corporate decisions. Quality circles, self-directed work teams, and employee representation on the board of directors are probably the best-known examples of this phenomenon.

These forms of workplace organization have garnered considerable attention from labor lawyers and economists, but relatively little from corporate law academics. This is unfortunate, both because the tools routinely used by corporate law academics have considerable application to the problem and because employee participation is ultimately a question of corporate governance.

According to conventional academic wisdom, perceptions of procedural justice are important to corporate efficiency. Employee voice promotes a sense of justice, increasing trust and commitment within the enterprise and thus productivity. Workers having a voice in decisions view their tasks as being part of a collaborative effort, rather than as just a job. In turn, this leads to enhanced job satisfaction, which, along with the more flexible work rules often associated with work teams, results in a greater intensity of effort from the firms workers and thus leads to a more efficient firm.

Although this view of participatory management has become nearly hegemonic, the academic literature nevertheless remains somewhat vague when it comes to explaining just why employee involvement should have these beneficial results. In contrast, my article presents a clear explanation of why some firms find employee involvement enhances productivity and, perhaps even more important, why it fails to do so in some firms. Despite the democratic rhetoric of employee involvement, participatory management in fact has done little to disturb the basic hierarchial structure of large corporations. Instead, it is simply an adaptive response to three significant problems created by the tendency in large firms towards excessive levels of hierarchy. First, large branching hierarchies themselves create informational inefficiencies. Second, informational asymmetries persist even under efficient hierarchial structures. Finally, excessive hierarchy impedes effective monitoring of employees. Participatory management facilitates the flow of information from the production level to senior management by creating a mechanism for by-passing mid-level managers, while also bringing to bear a variety of new pressures designed to deter shirking.

Abstract: The tradition of giving finds itself in every religious text across the world. There seem to be few other principles which are so globally accepted. Whether it is the Zakat, the Islamic practice of giving and consequent self-purification, or the Dāna, the practice of giving in both Hinduism and Buddhism, the concept of gratuitous transfer of wealth to the less privileged strikes a common chord between the three most popular religions in Asia.

This paper seeks to first identify the traditions relating to charity within religious texts such as the Hadith, the Manusmriti and the Tipataka. In the absence of institutions, including the concept of the corporation, during the time when such religious texts were envisaged, the directions mandating charity are by default, applicable to individuals. This paper goes on to examine the creation of the modern-day corporation through the lens of independent corporate personality as well as a nexus of contracts.

Arguing further that -- in the absence of a large number of shareholders, Asian corporations tend to be family and individual driven -- such families and individuals may have a propensity to inculcate their individual traditions into inanimate and juristic bodies such as the corporations they run and control. As a result, this paper finally considers whether the tradition of giving, as mandated by religion may be a significant factor to boost Corporate Social Responsibility. While most Asian countries have some form of voluntary guidelines on corporate social responsibility, mandatory laws relating to CSR have been passed in Indonesia and India. A recent report even suggests that Asian consumers would be willing to spend more on products manufactured by socially responsible companies. This paper posits that a tradition of giving, spurred by religious mandate, does make CSR far more relevant in Asia.